In my experience, the older we get, the more we realize how much there is to be thankful for.
This realization often prompts a desire to give back. To share our personal blessings with the world around us. That’s why, for many people — especially those nearing or in retirement, although it’s not exclusive to them — the idea of “charitable giving” is a particularly compelling goal. A goal that adds meaning to a person’s life…because it enables them to help the lives of those around them.
But while the spirit of giving comes from the heart, that doesn’t mean the head can’t have its say. You see, just as there are specific motor vehicles for specific tasks — a sports car for speed, a truck for towing, a jeep for off-roading, a mini-van for families — there are specific kinds of charitable vehicles, too. Some vehicles are better for specific charitable goals than others. And some vehicles may make more sense for your personal finances. (Especially your taxes.)
If you are just now exploring the idea of charitable giving, or think you would like to in the future, it’s important you know what your options are so that you choose the right one for you. But even if you are an experienced philanthropist, it’s always a good idea to review whether your vehicle is still the right one for you.
With that in mind, here are four of the most common charitable giving vehicles on the lot, along with a quick overview of their pros and cons.
Vehicle #1: Donor Advised Funds.
Also known as a charitable gift fund, a DAF is a type of investment account specifically designed to enable people to support charitable organizations they care about. Through a DAF, you can contribute cash, equities, and even alternative assets like cryptocurrency or private stock. All contributions are tax deductible. In fact, you can potentially deduct up to 60% of your adjusted gross income when contributing cash.1
Perhaps the biggest benefit to a Donor Advised Fund, however, is the flexibility it offers. With a DAF, there’s no deadline for when you must donate the funds to charity. That means you have plenty of time to determine which organizations you want to donate to while still setting money aside in a tax-advantaged way. Another cool feature? Multiple people can contribute to the same DAF, allowing you to pool resources with family if you don’t have the ability to make a particularly large donation on your own.
All that said, a DAF may not be the right option if you want to control exactly how your donations are used. At the end of the day, it’s the charity that determines how the funds are used, although you can make suggestions. (That’s why it’s called a Donor Advised Fund, not a Donor Controlled Fund.) Furthermore, all donations made are irrevocable. You can’t take any of the funds for your own use once donated. DAFs have fees and expenses that donors giving directly to a charity would not face.
Vehicle #2: Private Foundation.
The term “private foundation” might sound like something only those on Forbes’ annual billionaire’s list would need, but pretty much anybody can set one up — provided they do it properly. A private foundation is a legal entity created solely to contribute to charity. It’s similar to a public charity, except that while a public charity can be supported through fundraising, a private foundation is funded by a single individual, family, or corporation.
There are two main advantages to setting up a private foundation. First, it gives the owner complete control over the funds inside the foundation. You determine the foundation’s mission, how funds are invested, where donations go, and even how the charity should use the money. Second, a foundation can exist in perpetuity. That makes it the ultimate way to establish a legacy that lasts for generations.
The downside is that this is not a “set it and forget it” option. Establishing a private foundation requires approval by the IRS, not to mention strict annual reporting. You would also need to form a Board of Directors to oversee the fund’s activities. At the end of the day, a private foundation isn’t just something you start. It’s something you run, which can be a tricky and time-consuming process.
Vehicle #3: Charitable Remainder Trust.
What if you want to make a significant donation to a charity, but can’t because doing so would have a negative impact on your cash flow? Enter the Charitable Remainder Trust, or CRT. With this vehicle, you contribute assets to a trust. The trust then makes yearly distributions back to you for a set number of years. After this period ends, all remaining asserts pass to the charity — or charities — of your choice. By doing this, you ensure both an income stream for yourself and a legacy to whatever charities you support. (In some cases, this could even be your private foundation!)
It's important to note that establishing a CRT requires an attorney and may not come with the income tax benefits of other vehicles. Furthermore, a CRT is an irrevocable trust, meaning once it’s set up, you can’t change it later.
Vehicle #4: Charitable Lead Trust (CLT).
A CLT is like a CRT flipped inside out. With this vehicle, your designated charity receives regular payments for a fixed period of time. Then, whatever is left goes to your own family, exempt from any estate or gift taxes. This makes a CLT a potentially good option for those who want to balance charitable giving with their overall estate plan.
But a CLT isn’t right for everyone. There are two types of a CLT. Each has its benefits and problems. You will want to work closely with your attorney and other professionals to discuss the details as it gets pretty complex. A CLT is also an irrevocable trust, limiting your flexibility.
If you would like to know more about any of these, please contact us.
1 “Publication 526, Charitable Contributions,” Internal Revenue Service, https://www.irs.gov/publications/p526
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal professional.